Aug. 9 (Bloomberg) -- The Federal Reserve said it’s
conducting tri-party reverse-repurchase agreements as part of
readiness testing of operational tools for the eventual
withdrawal of monetary stimulus.

The “small-value” transactions, part of a series of open-market operations that began in 2009, don’t signal any change in
monetary policy, according to a statement posted Aug. 5 on the
Fed Bank of New York’s website. Treasuries and mortgage-backed
securities will be used as collateral.

The Fed uses repos and reverse repos to help maintain the
level of money in the banking system to keep overnight interest
rates close to its target. The central bank has held the target
rate for overnight loans between banks in a range of zero to
0.25 percent since December 2008.

In a reverse repo, the Fed lends securities for a set
period, temporarily draining cash from the banking system. At
maturity, the securities are returned to the Fed, and the cash
to its counterparties.

In a tri-party arrangement, a third party functions as the
agent for the transaction and holds the security as collateral.
JPMorgan Chase & Co. and Bank of New York Mellon Corp. are the
only banks that serve in a trade-clearing capacity in the tri-party repo market.

The central bank’s large-scale asset purchases, known as
quantitative easing, have swelled its balance sheet to more than
$3.5 trillion, as policy makers have sought to reduce borrowing
costs and stimulate growth. Fed officials have listed tri-party
reverse repos as one tool they will use when they begin to drain
cash in the banking system.